Why do profit and loss accounts matter?

The profit and loss account and the balance sheet together make up the financial statements. Eenmanszaken (sole proprietorships) are not required to draw up financial statements, while bvs are. 

What is a profit and loss account? 

A profit and loss account is a periodic summary of the income and expenditures of a business. It is the financial overview a specific period (typically 1 year). You simply add up all the revenues of your business and then deduct your expenses. 

What to include in your profit and loss account 

You put your turnover (revenue), expenses, and profit in your profit and loss account. Your profit can also be negative; then it is called a loss.

Turnover is the result of the sales of products and/or services over the course of one year. You must then deduct the purchase value from the revenue. Next, you add up all the business expenses. Your profit is the outcome of this sum: turnover minus purchase value and expenses. 

On page 17 of the Book of Finance, you will find an example of a profit and loss account (income statement). 

Annual statement 

Employees receive an annual statement from their employer once a year, which shows the gross wage for that year, the social security contributions withheld, and payroll tax. This tells employees at a glance how much their employer paid and how much salary they received. Was the employee able to live on this money, rent or buy a house, or redeem a loan? In addition, the annual statement is a means of verifying income for an income tax return, the Employee Insurance agency (UWV), or mortgage providers. 

If you are an independent business owner, you will not automatically receive an annual statement telling you how much profit your business earned during a particular year. But you would like to know the income from your work. The profit and loss account is a type of annual statement for your business, which will also tell you how much you earned in turnover, how much you spent on purchasing, and what your expenses were. Just like an employee, you look back and calculate whether your bottom line is sufficient to cover personal expenses, repayments, and interest. 

What purpose does it serve? 

You can use the numbers from your profit and loss account to make changes to your business where necessary. Is your net profit at the desired level, or below target? You will want to hang on to a positive result (profit), and even increase this profit. Discuss the numbers with your financial consultant. You might want to go over the expenses, how you can cut costs, price calculations, and purchasing benefits. You can also compare your data with that of other business owners operating in your sector. Request this data from your sector organisation or bank. 

Financing 

Financiers, such as banks, get valuable information from the profit and loss account and balance sheet. They do this using calculation formulas (key figures). The outcome of these calculations will show them whether your business is in good financial health. Financiers will look at your revenue and purchase data, and compare your numbers against those of other businesses operating in the same sector. 

If you are looking for funding, make sure you create a realistic profit and loss account. You should also create a ‘scenario B’ with 15% less revenue. Adjust your purchase costs and variable expenses too. Fixed expenses such as rent and staff costs will remain unchanged. You should then ask yourself if you will make enough net profit, taking into account your personal budget. 

Financial insight 

Your profit and loss account will give you financial insight. You can enlist the services of an expert, such as a bookkeeper or accountant, through NOAB  (in Dutch) or NBA, to help you.

Improving your insight 

Improve your financial insight with tips from the video. English subtitles are available. 

Proof for the Netherlands Tax Administration

You have to pay tax on your business profits. The amount you pay depends on several different factors, including your profit and the type of tax (income tax or corporate tax) and on tax schemes.

Every company has to keep records. The Tax Administration determines how much you need to pay after checking your records. If you have an accurate profit and loss account, you will receive a tax assessment for the correct amount. If you inaccurately state the amount in profit you have earned, the Tax Administration will estimate your profit. This estimate is usually not in your favour.